Birthday ruminations

For those of you that keep asking, I write this blog primarily because I love the “I told you so” moment. But just as satisfying is to point out the unwitting hypocrisy in people’s lives.

I say unwitting because most people are just too busy in their daily routines to be able to zoom out of their lives to notice how everything is interconnected and how people’s choices very often are not free but are in fact directed and how when these choices are made the ramifications extend to aspects of life that are otherwise apparently unrelated.

Just for a change, lets take the monetary system 🙂

Here is a system that pretty much sits behind every single aspect of human development and that is THE ultimate enabler of all human action and yet even amongst the few that may know what a monetary system is, even fewer know what the ramifications of the choice of a system over another may be.

Barter is a form of monetary system. Barter has been used throughout the ages and, though not an officially recognized system of exchange,  it is still in use today. Everyone resorts to barter at some point in their lives. The interesting thing about barter is that since it relies on an agreement between two parties, the exchange is not subject to taxation by the government (unless the items being exchanged are somehow registered with the government like a car or a house).

But just because barter requires an agreement between two parties AND because most barter would escape government taxation, organized societies cannot and will not adopt it as a viable system of exchange. It is just too cumbersome to allow the development of society at a viable rate.

If society is to organize and develop, exchange we must, so that a form of monetary system is inevitable and necessary. Nay, it is vital.

Other than barter, the choices of monetary system are spectacularly limited. So limited in fact that it boils down to two systems.

One system will be based on some sort of intrinsic value. Throughout the ages, salt, stones and shells have been used as basis of exchange thus the monetary system derived its strength from the desirability and/or scarcity of the medium of exchange.

One system will be based on political fiduciary duty. Call it honesty, rectitude or plain old decency. But that’s all that props up this system and nothing else.

The former system is a “value based” monetary system whilst the latter is a “fiat” monetary system.

Let me hasten to say here that fiduciary duty is an integral part of a value based monetary system too. But at least in a value based monetary system there is an objective measure of value against which aberrant policies or corruption can be flagged beyond all reasonable doubt. As an example of deteriorating fiduciary duty perpetrated behind the screen of the soundness of a value based monetary system take the USA from 1931 to 1971. During this period of time, the US government claimed to operate the monetary system within the confines of the value of its gold reserves (the US gov had confiscated all gold instruments by 1931). In other words, the US government claimed that it was not engaging in inflationary policies. At this time, the USA was already the de facto world industrial powerhouse and on its way to become the de facto global military hegemon so that they had already attracted significant gold deposits from numerous sovereigns. As we all know today, in 1971 the charade came to an end when France attempted to exchange their US Dollar reserves for the gold they thought they were entitled to but, of course, the gold wasn’t there.

All that to say that a value based monetary system by itself is no guarantee of fiduciary duty on the part of government. What does however guarantee a higher degree of fiduciary duty, is transparency. There is no substitute for transparency. So that a government, any government, cannot be expected to provide fiduciary duty unless transparency is ensured first.

So, a monetary system is vital to human development. But why does it matter whether we choose one system over another and, most importantly, why is inflation a problem? After all, there are scores of Noble laureate economists that claim that inflation is not only a desirable dynamic but it is necessary in order to develop society.

If you are a regular of this blog, you will know that inflation is a monetary dynamic that devalues the purchasing power of the currency thus causing a nominal rise in the trading value of goods and services thus causing a rise in the nominal value of GDP. The devaluation of the currency is also purported to have another beneficial effect in that economic actors always need more money in order to secure the same quantity and quality of goods and services so that inflation is perceived to cause a rise in employment (whereas in low inflationary environments one family can live on one salary, as inflation progresses, more salaries are required in order to maintain a constant level of quality of life if not increasing it). A rise in employment, it is thought, will occasion a rise in demand thus fostering industrial expansion, thus fostering a rise in employement… rinse, repeat… thus inflation is desirable.

But of course, from the arithmetical point of view, inflation is not and cannot be infinite. If that were not the case, Bretton Woods would never have been abrogated in 1971 when France asked for its gold back. If printing money was a viable solution, then in 1971 the USA could have just printed a bunch of dollars and gone out to buy some gold to give back to France. But they didn’t because they couldn’t. And the couldn’t because the purchasing power of the US$ had been depleted. They couldn’t because they had reached the limit of the presumed beneficial effects of inflation.

It is an arithmetical truth that inflation is limited mathematically. But can inflation be evil?

If you listen to the Noble laureates making their case, inflation is a necessary dynamic but it most certainly is not evil. Bear with me a while longer.

Social Security a tool of inflation

As outlined above, inflation is a dynamic that conforms to the law of diminishing marginal utility because as it erodes the purchasing power of the currency, it is a self reinforcing dynamic. As Argentina found out in 1997 and the USA found out in 1971 and in 1929 and as John Law found out in XVII century France and as the Romans found out when the gold content of their currency was being scraped off and as the Chinese found out even before the Romans, devaluation will eventually bring about the demise of empires. Not only that but on the way to demise, collateral devastation lays waste to countries and people well outside the borders of the stumbling hegemon.

That has always been so and there is no reason on God’s green earth why it should be different this time. The arithmetic behind the dynamic is a universal truth.

That being the case, how can inflation be evil? This answer touches on different aspects of society and life in general.

Like all dynamics, inflation goes through several stages. Each stage requires a set of government policies aimed at extending the effects of inflation on the economy. Take social security. Social security has been hailed as one of the greatest social achievements ever. But in fact, SS is nothing but a tool of state to extend the effects of inflation. SS requires payments into a fund. This does two things for the monetary authorities. First, regular rounds of payments help maintain positive the velocity of the currency. But, more interestingly, for as long as more people pay into the fund than people take out, government can make use of the excess funds free of charge thus lowering its need to issue sovereign bonds. Ergo, the government can spend money without paying interest and increasing the velocity of the currency. But the real beauty of SS is that it make the citizen dependent on the state. Other than eroding the purchasing power of the currency thus discouraging savings, the fact that citizens think they can rely on the state for retirement induces them to save even less thus spend more.

To be continued later…

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2 Responses to “Birthday ruminations”

  1. Patrick Donnelly Says:

    The ir = their!

  2. Patrick Donnelly Says:

    I believe I scent a dead rodent?

    Social security is like all spending as the citizens “benefit” from the apparent generosity of the ir voted for government, they have a basis for voting and continuing the farago!

    Social security is no different and you know it! 4 stars Guido, even if it is your bloody birthday!

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